MoF prepares draft policy on SOEs

ISLAMABAD: The Ministry of Finance (MoF) has prepared a draft state-owned enterprises (SOEs) policy with the objective of effectively managing the fiscal risks associated with SOEs.

Pakistan has around 200 SOEs which are engaged in a diverse range of activities, represent a significant part of Pakistan economy, and provide and manage a significant share in the country’s infrastructure, communication and utilities sectors.

The optimal performance of SOEs is the requisite crucial factor for medium to long-term macroeconomic resilience and growth prospects.

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The optimum performance of SOEs can be attributed to several factors, including: (a) a consistent and overarching law that applies to all SOEs; (b) an overarching SOE ownership and reform policy; (c) clear commercial mandate under which SOEs may operate; (d) well-defined criteria to appoint capable and well-equipped Boards of Directors govern SOEs; (e) effective centralized SOE ownership monitoring; (f) Economic and strategic analysis of SOE performance and financial monitoring and (g) transparency and effective accountability system.

The draft policy noted that the federal government shall own or retain only those SOEs that are determined to be strategic as approved under SOE Triage. Strategic SOEs are those SOEs that (a) have such significant strategic, security, or social importance that they cannot be entrusted to only private ownership.

Strategic SOEs can be defined as those SOEs undertaking a strategic objective or owning and managing strategic assets, (b) are a monopoly service provider and there is no effective economic regulatory oversight of their operations.

However, in such cases, the Federal Government may explore transformation options such as outsourcing and management transfer options with sufficient safeguards embedded.

The draft policy envisaging to provide for (a) the criteria and rationale for ownership, retention, and establishment of SOEs by the federal government; (b) the role of the Federal Government in the governance of SOEs; (c) the manner and procedure for exercising the rights of the federal government as a shareholder in SOEs, including, without limitation, matters enumerated in sub-section 2 of section 29, subject to the principles laid down in the Act; (d) clarification of the respective roles and responsibilities of any division of the federal government (e) the role of and manner of operation of the Central Monitoring Unit (CMU); (f) the form and procedure for management and use of the electronic SOE database, including right of access by the public; (g) guidelines for board nominations committee while exercising its functions; (h) the process for evaluating the performance of ex-officio and independent directors; (i) the cooling off period for the appointment of independent directors; (j) the manner of regulation of conflict of interest of directors, including procedures for identification and reporting of direct and indirect interests of directors and resolving any conflict of interest (k) a framework for ensuring competitive neutrality of the State with respect to state owned enterprises; (l) a public sector obligation management framework; (m) process of monitoring and managing contingent liabilities of SOEs and (n) the criteria for excluding a SOE.

It further stated that the federal government may set up SOEs as agreed by the federal government in any government-to-government agreement with other countries provided that in future, while entering into any such agreement which requires the federal government to establish an SOE, the government shall attempt to comply with the principles set out in this policy as far as possible.

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The draft policy noted that each Division of the federal government which has SOEs operating within its administrative control under the Rules of Business, 1973, shall develop a reform plan for SOEs under their oversight and categorize the SOEs according to the following (i) Strategic SOEs, as defined; (ii) Commercial SOEs to be privatized; (iii) SOEs required to be restructured/reformed and retained in the medium-term; and (iv) SOEs required to be restructured/reformed prior to privatization; The reform plan may include proposals for reforms of SOEs such as listing of SOEs, restructuring and mergers, entering into public-private partnerships (PPPs), contracting out operations and asset sales; and include rationale for the categorization and transformation options recommended and a timeline to implement this measure.

The relevant Division shall submit its recommendations for each such SOE to the Cabinet Committee on SOEs within six months of the coming into effect of this Policy.

For non-strategic SOEs, line ministries/divisions will develop a plan to transform these SOEs through different options including but not limited to corporate restructuring, management contracts, joint ventures, public-private partnerships, and outsourcing under applicable laws.

In case of an SOE is facing financial or operational problems, the Federal Government shall require the Line Ministry, in consultation with CMU if so required, to develop a transformation plan for financial and operational improvement of the SOE.

The policy noted that if a SOE is unable to perform satisfactorily financially and operationally after repeated efforts to improve performance, the Federal Government shall: (i) declare it a sick company in terms of section 292 of the Companies Act, 2017 and any institution, authority, committee, or person may be authorized thereunder to draw up a plan for the rehabilitation, reconstruction, and reorganization of such SOE; (ii) allow the Privatization Commission to determine the next steps for these SOEs, and in this regard, the federal government if it deems appropriate or necessary, may recommend measures to protect the strategic interest of the Federal Government during the transformation process.

The CMU shall provide financial and operational performance analysis along with recommendations to the Federal Government on all matters related to the operation, performance, and governance of SOEs, including: (a) the overall performance of SOEs; (b) performance of SOEs against their primary objectives, business goals, and financial and non-financial performance targets and benchmarks; (c) investment in, loans to, and guarantees of SOEs; (d) the risks associated with the SOE sector that could affect the State’s investment in SOEs and the State’s exposure to explicit and implicit fiscal risks associated with SOEs; (e) proposals relating to major transactions by SOEs as and when required by the Federal Government; (f) international and national best practices by SOEs for encouraging and enhancing efficiencies and service delivery, and for improving performance; (g) maintaining data on a pool of pre-qualified individuals for consideration as directors by the Board Nomination Committee (BNC).

The CMU will maintain a database of all directors of boards of SOEs based on the board approvals by the federal government. At the end of a board member’s tenure, the line Ministry/Division will submit a performance evaluation of the board and its members.

The said evaluation will be maintained as a record for considering the same members to be appointed to the same or any other SOE in the future provided that such database shall not be an exclusive database for consideration of individuals as independent directors of SOEs, and individuals not included in this database shall also be considered for appointments as independent directors.

The Ministry of Finance, through the CMU, will establish a central electronic database of information on the financial and non-financial performance of every SOE. The Ministry of Finance will ensure the hiring of professionals in the areas of corporate finance, corporate law, strategic planning and management as CMU staff members. The database developed by the CMU will generate bi-annual reports for the review of CCoSOEs.

CMU will analyze SOE business plans and will present their analysis and recommendations to CCoSOEs. CMU may also provide input on the draft SCI, business plan and reports by the SOEs if required.

However, such input provided to the line ministries and SOEs will not be binding. CMU will develop a monitoring framework for the SOEs against the financial and non-financial benchmarks agreed in the business plans. The annual consolidated monitoring report of SOEs will be published on the website of the Finance Division at the beginning of the second quarter of each succeeding fiscal or Calendar year (whichever is more appropriate).

The Law Division, in consultation with all stakeholders, will develop a mechanism to reduce unnecessary interventions by investigative agencies and frivolous litigations against Directors, CEOs, and Staff of SOEs.

The mechanism to reduce unnecessary interventions by investigative agencies and frivolous litigations will be submitted to CCoSOEs for further instructions on implementing the proposed mechanism, including, without limitation, any amendment in the applicable legal framework to be approved by the Cabinet.

No SOE (or any subsidiary of a SOE or other Federal Government department) will be granted any special exemption which gives them an unfair competitive market advantage or maintain a dominant market position to the detriment of development of a sector unless notified by the Federal Government on a project-to-project basis.

The Federal Government will ensure that SOEs do not enjoy any competitive advantages over their private sector competitors-without objective justification-simply by virtue of their state ownership.

Lack of competition weakens SOE incentives to improve in terms of efficiency and profitability. No SOE will carry a cost or gain a benefit simply due to its state ownership.

Copyright Business Recorder, 2023